Is Groupon Short on Cash?

Groupon (Nasdaq: GRPN) has two categories of customers that it needs to satisfy: merchants and coupon buyers. The company isn't always doing the best job at keeping the former happy.

You'd think Groupon would try harder to please merchants, considering how many companies are storming the local-deals business, from Travelzoo (Nasdaq: TZOO) flying in to OpenTable (Nasdaq: OPEN) reserving its spot. Even The Knot (Nasdaq: KNOT) and AOL (NYSE: AOL) have jumped on the bandwagon.

The Wall Street Journal reports that an increasing number of merchants are getting fed up with freshly public Groupon's payment terms, which is driving them to competitors. The issue lies in how long merchants have to wait before Groupon will pay out its end of the bargain.

How long must we wait?After a deal goes out and coupon buyers fork over their cash upfront, Groupon doesn't pay out the merchant's portion immediately. Instead, it pays out in three equal installments over a period of up to 60 days. In contrast, Amazon.com (Nasdaq: AMZN) investee Living Social and its own Amazon Local service pay out 100% to merchants within 15 days. Google's (Nasdaq: GOOG) service, Google Offers, pays 80% within four days and the rest within 90 days.

Smaller businesses that are more concerned with immediate cash flow tend to get peeved, since they have to honor the coupons immediately and then wait to collect from Groupon. Others don't mind the wait, since it can take months for all the coupons to be redeemed.

A line out the doorGroupon doesn't intend on changing its ways, either, and for a variety of reasons. The company has said it has seen some merchants use Groupon as a cash generator when times are tough, and if the merchant goes under, coupon buyers and Groupon are left holding the bag.

The company also has a refund policy that it needs to factor in for some inevitable returns. It also doesn't hurt that Groupon says it has a backlog of 49,000 merchants wanting to sign up.

Cash is kingThe practice has boosted Groupon's cash-flow figures, which have contributed to its lofty valuation. Reducing the payout timeframe could put Groupon itself in a cash crunch, with WSJ quoting Susquehanna analyst Herman Leung as saying that each one-day reduction in merchant payables is a risk of $14 million in free cash flow.

Just because the cash is in your bank, does that mean it's yours?According to its prospectus, Groupon had $243.9 million in cash and equivalents at the end of September, compared with $465.6 million in accrued merchant payables.

Groupon also doesn't defer revenue; it recognizes net revenue once the coupon is sold, and it delivers the listing of coupons sold to merchants. Its Revenue Recognition policy says nothing about having purchasers actually redeem the coupon, since the company is merely acting as an agent for the merchant. From an accounting perspective, its job is done once it hands over the list.

This means there's no deferred revenue figure being accrued as the company rakes in cash for coupons yet to be redeemed. If Groupon were the one actually providing the good or service offered in the coupon instead of just being a middleman, it would have to track deferred revenue until it delivered. Groupon does have a refund policy, though, so it may have to give some back to unsatisfied purchasers.

Giving some backPart of the accounting behind Groupon's refund policy also strikes me as a little odd. When revenue is booked, the company deducts an estimated allowance of refunds based on experience, which is perfectly normal. The company records a refund differently, depending on whether the amount is recoverable from the merchant.

If the amount of the refund is recoverable, it backs it out of top-line revenue. If the amount is not recoverable from the merchant, it is considered a cost of revenue, leaving the top line alone. No glaring oddities there.

The only strange part is that it says the extent to which a refund is provided is recorded within selling, general, and administrative expenses on the income statement. Doing so puts the expense underneath gross profit on the income statement and includes the expense as an operating expense, which helps boost the company's reported gross margin.

Rich on revenue, poor on cashProlonging merchant payments has more positive impact on Groupon's cash-flow figures than its revenue figures. When it comes to cash flow, Groupon simply can't afford to pay out to merchants as quickly as its rivals do.

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Well, I don't believe in this company either. They have to show themselves over some time before I start to believe in the company's business. But we will see. I'm standing at the side lines and watching.

@cabostacos

However, I'm kinda amazed that you have been able to borrow shares to short of Groupon. Did you get in on the IPO or just imaginative short? :)

I'm no financial whiz, but if you are holding on to old deal revenues to finance operations, then rely on ever more deals to generate money, is this not a Ponzi scheme? What happens when the deals are lower quality and stop bringing in so much money, which some say is already happening.